The markets around the world are searching for bottoms: the German DAX, the Japanese Nikkei, and our Dow Jones 30 index are at or near 52 week lows. The psychology couldn't be more pessimistic as witnessed by the rise in gold to $1,000, yet POTC believes there is a fantastic low risk opportunity in Sears Holding (SHLD). Sears reports their Q4, '09 results before market open on Thursday, February 26th.
POTC feels confident putting a strangle position on SHLD options. On Monday we will buy 20 call contracts for March at the $45 strike between $.70 - $.80: http://finance.yahoo.com/q?s=KTQCI.X
& 10 put contracts for March at the $30 strike between $1.40 - $1.60 http://finance.yahoo.com/q?s=KTQOF.X
The total dollar amount for the stated number of contracts in this strangle position comes to approximately $3,000. We will provide an update on the trade as it evolves, beginning on Tuesday afternoon. ~IF this trade doesn't fit your 10% account parameter (First Commandment), please adjust accordingly, as we consider a balanced strangle equal to one position.~
Besides the earnings catalyst this Thursday from SHLD, another important driver will be an earnings report from General Growth Properties Inc. (GGP) on Monday, February 23rd after market close. We know GGP will report very negative news, yet because the market is so oversold and psychology so gloomy of late, we are entering a strangle position in SHLD and looking-forward to a violent reaction in either direction.
It's possible the market ignores the negativity from GGP due to extremely oversold technical conditions and the very large short position in SHLD ends up propelling share price through $45 in a blink. Short interest stands at 15M shares, equal to a 13 day average daily volume coverage time frame! http://www.shortsqueeze.com/?symbol=shld
The inverse price violence is as likely, making good sense for strangling.
Fundamentally SHLD looks to be in deep balance sheet, income statement, and cash flow trouble, yet Psychological Financial Fusion teaches us to never rely solely on fundamentals or technicals, but to respect both with a little sprinkling of psychology. President Obama's speech Tuesday night adds that political/policy final dark horse element to the mix which many traders overlook. POTC feels this administration has made mistakes, yet some talking heads are rushing to judgment too quickly. The policy pendulum may swing on a dime, so exhibit caution.
The Psychology of the Call thanks you for your continued support and wishes the week ahead is filled with better trade management & greater returns.